DBRS Confirms Caterpillar Ratings at “A,” R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the ratings of Caterpillar Inc. (Caterpillar) and Caterpillar Financial Services Limited (collectively, CAT or the Company) at “A” and R-1 (low), respectively. Concurrently, DBRS has assigned a new Issuer Rating to Caterpillar Financial Services Corporation (CFSC) at “A.” The trends are Stable. DBRS’s ratings reflect the Company’s solid business profile as a leading global machinery manufacturer and its financial profile, which maps solidly in line with the current rating. The Company’s results have been under pressure because of the ongoing weakness in the mining sector but were largely in line with expectations. Earnings will likely deteriorate over the next 12 months because of continued commodity price weakness as well as the recent decline in the price of oil. Credit metrics are expected to follow a cyclical deterioration toward the low end of the current rating range, although DBRS notes that there is room to absorb the expected impact while remaining appropriate for the rating. DBRS expects the rating to remain stable over the next 12 months.

Caterpillar’s results were in line with expectations during 2014. Total sales declined 1% due to a large decline in the resource industries, which was partially offset by increases in the construction industries and energy & transportation segments. Resource industries segment sales decreased 24% due to the large decline in sales of mining equipment, which comprises the majority of sales in this segment. Sales in the construction industries segment increased 4% primarily as a result of rebounding construction and housing activity in the United States. Sales in the energy & transportation segment increased 8% primarily as a result of sustained oil & gas activity over 2014 and solid demand from the rail industry. Caterpillar’s earnings remained resilient despite the decline in sales. EBITDA increased approximately 3% despite the impact of the slowing environment. The Company benefitted from lower labour and materials expenses and from ongoing cost reduction efforts. Resiliency in earnings and cash flow from operations enabled Caterpillar to maintain its credit metrics in line with the current rating category.

The Company is likely going to face additional pressure to its sales, earnings and cash flows over the next 12 months. DBRS expects the recent decline in oil prices to further pressure the operating results and total sales are forecasted by the Company to decline by approximately 10% marked by declines across all reporting segments. An even greater decline in earnings and cash flows is expected because of deterioration in product mix and cost absorption. With lower earnings and roughly unchanged debt balances, DBRS expects weaker credit metrics at the end of 2015.

Notwithstanding the forecasted pressures on operating results over the next 12 months, the financial profile is projected to remain commensurate with the low end of the current rating range based on the cushion under the credit metrics presently. Overall, DBRS expects the ratings to remain stable over the near term, noting CAT’s strong business profile. Nonetheless, with some uncertainty continuing to linger with regards to the duration and severity of the current cyclical downturn, DBRS notes that it could reassess the rating in the event that the downturn is more severe than expected and persists beyond the next 12 months.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Industrial Products Industry (January 2015), Global Methodology for Rating Finance Companies (October 2014), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (July 2013), which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related research at the right of the screen or by contacting us at info@dbrs.com.